Analysts positive on Proton-Geely deal
KUALA LUMPUR: Analysts laud the move by DRB-Hicom Bhd (DRB-Hicom) to sell a 29.9 per cent stake of Proton Holdings Bhd (Proton) to China automotive giant, Zhejiang Geely Holdings Co Ltd (Geely) for RM170 million following Proton’s financial deterioration over the years.
Should the deal go through, a second provisional agreement between DRB-Hicom and Geely for the sales of a 51 per cent stake in Group Lotus Plc (Lotus) – a UK racing car manufacturer owned by Proton – will take place for a total cash consideration of RM284 million.
“Obviously, DRB-Hicom had to take haircuts relative to its initial investment in Proton of RM3 billion for a 100 per cent stake and Lotus of RM1.96 billion for a 100 per cent stake.
“However, performances of both companies have deteriorated significantly since 2012, and based on their current states, the deal looks favourable on a profit over net tangible assets basis,” said the research arm of MIDF Amanah Investment Bank Bhd
Obviously, DRB-Hicom had to take haircuts relative to its initial investment in Proton of RM3 billion for a 100 per cent stake and Lotus of RM1.96 billion for a 100 per cent stake. MIDF Research
(MIDF Research).
To note, Proton and Lotus both registered losses of RM987 and RM68 million respectively for financial year 2017 (FY17).
The team over at Kenanga Investment Bank Bhd (Kenanga Research) further supported the deal, and highlighted that it did not included Proton’s landbanks that totalled a combined estimated book value of RM540 million.
This included its Shah Alam plant, Glenmaries Land, Bristol land and other assets.
“The RM727 million divestment is way higher than Proton FY17 net assets of RM29.5 million,” said the research arm, adding that the total divestment figure was inclusive of the remaining 49 per cent stake sale of Lotus to Etika Automotive Sdn Bhd for RM273 million.
Further highlighting the attractiveness of the Proton divestment, MIDF Research explained that under the proposed agreement, Proton would be granted the license to manufacture, sell, market and distribute identified Geely platform vehicles under the ‘Proton’ brand name in Malaysia for a period of five years.
“This should help Proton to plug the gap in cash flows and help generate cash to plough into Research and Development (R&D) of new models for the next cycle beyond the five years for the rebadged models.
“On top of this, the rights to manufacture and distribute Geely’s Boyue SUV model in Right Hand Drive (RHD) South East Asia (SEA) markets should also drive meaningful volumes for Proton given its current absence in the SUV segment and should drive better cash flow generation,” said the research arm while adding that the Boyue model was one of Geely’s bestselling models and accounted for 22 per cent of the group’s total car sales in the first four months of 2017 (4M17).
While both research firms were positive on this move, Kenanga Research said it would still be tough for Proton as there was overall weakness in the automotive segment amidst fragile consumer sentiment.
“We are sceptical on its (Geely) ability to assist Proton from a technical and marketing perspective as well as to penetrate new markets given Geely is also a relatively weak brand from a global perspective with a global market share of under five per cent.
“Proton still has to deal with the challenges posed by increasing competition and a weak brand perception.
As a result, DRB-Hicom’s outlook remains challenging given its tough operating environment and stiff competition.”
Due to this execution risk, Kenanga Research has decided take a slightly conservative stance and only upgrade DRB-Hicom’s rating to ‘market perform’ from ‘underperform’ with a target price of RM1.75 from RM1.
On the other hand, MIDF Research believes that at this juncture it would be a safer bet for investors to look towards the automobile vendors instead.
“The expansion in product line-up means product and volume expansion and will therefore provide opportunities for increased supplies of Proton – key client of local vendors.”